Financial Data
Updated 29 Sep 2020

The economics of branding

Positioning for maximum value 

Gerhard Reinecke, Entrepreneur, 26 January 2015  Share  0 comments  Print

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The law of supply and demand has been understood since the fourteenth-century, when Mamluk scholar Ibn Taymiyyah wrote:

"If desire for goods increases while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down."

This relationship was graphically depicted by Fleeming Jenkin in 1870, and has appeared in the first chapters of most economics handbooks ever since.

Branding 1

It gives us two value equations: a supplier who sees value as a price-quantity factor (V=PQ) or “what I value is to sell as many as I can for as much as I can”; and a consumer who views value as a price-quantity ratio (V=Q/P) or “what I value is to get more for less.”

Buyers and sellers bargain and finally agree at the point where the demand and supply curves intersect, and then… ka-ching!  If the billions of ka-chings that occur every day were audible, their collective din could drown out the noise emanating from the casino floors of Las Vegas.

So the economist’s view of consumer need is simply that “I want more for less.”  Many marketers have expressed this limited view of the consumer in value propositions and messaging; “Buy bulk and save”, “More car for your money”, “Trolley for trolley you pay less”, with the view of increasing short term sales objectives.

But wait there’s more…

The ‘more for less’ equation does not provide the marketer with a view on how to build the most essential component of profitability – brand equity.

Brand equity, in price terms, is the premium consumers are prepared to pay based on the perceived value of the brand, over and above the economic costs of production plus profit margin. Consumers would queue to pay more for an Apple iPhone 6, rather than just buy a android phone with similar functionality for much less, for example.

In the supply and demand graph of brand equity, supply can be seen as differentiation from competitors and demand as relevance to the customer. 

Relevant differentiation is experienced by customers as either a functional benefit (a high performance engine, for example) or an emotional benefit (a luxurious driving experience), or both – a brand that simultaneously makes rational sense and also feels right.

The consumer is not just looking for ‘more for less’, and their value equation could therefore be replaced by V= (FB+EB)/P, (Where FB = Functional Benefits and EB = Emotional Benefits) or “What I value is a quality that makes sense and feels right, given the price”.  If relevance increases, the demand curve will shift to the right to reflect an increased quality experience at a higher price level.

The result is a brand premium earned by improved benefits rather than an increase in volume through price reduction. It is an increase in overall value.

Branding 2

Bringing this economic thinking to brand positioning, we have to define a positioning territory that considers both demand and supply side factors.

If you want to position an airline as fun, for example, as Kulula has done, or a bank as innovative, as FNB has done, these positioning territories need to be relevant from the consumer perspective – speaking to who they are, their needs and benefit expectations - but they also need to be a reflection of the difference the brand can actually make in the consumer’s life. The brand positioning needs to be credible.

A strategically sound brand positioning will reflect both the cognitive and the psychological considerations that customers make before purchase.

And then, wait for it. Ka-ching! 

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About the author

Gerhard Reinecke, Entrepreneur

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